American Capital Agency's Q4 2015 Income Statement Projection - Part 2

| About: AGNC Investment (AGNC)

Summary

I am projecting AGNC will report a material net gain on derivative instruments and other securities for the fourth quarter of 2015.

Interest rate payer swaps experienced a modest - material increase in rates which positively affected valuations.

I am projecting AGNC will report a minor decrease in the company’s management fees expense for the fourth quarter of 2015 when compared to the prior quarter.

My projections for AGNC’s net income and earnings per share for the fourth quarter of 2015 are stated in the “Conclusions Drawn” section of the article.

Part 3 of this article will project the remaining accounts that make up AGNC's other comprehensive loss and total comprehensive income amounts which directly affect BV.

Author's Note: PART 2 of this article is a continuation from PART 1, which was discussed in a previous publication. Please see PART 1 of this article for a detailed projection of American Capital Agency Corp.'s (NASDAQ:AGNC) income statement (technically speaking, the company's "consolidated statement of comprehensive income") for the fourth quarter of 2015 regarding the following accounts: 1) interest income, 2) interest expense, and 3) gain (loss) on sale of agency securities, net. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1's analysis is provided below:

American Capital Agency American Capital Agency Corp.'s Q4 2015 Income Statement Projection - Part 1

This three-part article is a very detailed look at American Capital Agency Corp.'s income statement (technically speaking, the company's "consolidated statement of comprehensive income"). I perform this detailed analysis for readers who anticipate/want such an analysis performed each quarter to fully understand AGNC's ever-changing MBS and derivatives portfolio strategies. For readers who just want the summarized account projections, I would suggest to scroll down to the "Conclusions Drawn" section at the bottom of each part of the article. By understanding the trends that occurred within AGNC's operations during the fourth quarter of 2015, one can apply this information to sector peers as well. As such, the discussion/analysis below is not solely applicable to AGNC but to the fixed-rate agency mortgage real estate investment trust (mREIT) sector as a whole. This includes, but is not limited to, the following fixed-rate agency mREIT peers: 1) ARMOUR Residential REIT Inc. (NYSE:ARR), 2) CYS Investments Inc. (NYSE:CYS), 3) Annaly Capital Management Inc. (NYSE:NLY), and 4) Orchid Island Capital Inc. (NYSE:ORC).

Focus of Article:

The focus of PART 2 of this article is to provide a detailed projection of AGNC's consolidated statement of comprehensive income for the fourth quarter of 2015 regarding the following accounts: 4) "gain (loss) on derivative instruments and other securities, net" (including four "sub-accounts"), and 5) "management fees." PART 2 will also discuss AGNC's projected net income (loss) and earnings per share ("EPS") amounts.

4) Gain (Loss) on Derivative Instruments and Other Securities, Net:

- Estimate of $385 Million; Range $135-$635 Million

- Confidence Within Range = Moderate to High

- See Boxed Blue Reference "4" in Tables 4 and 6 Below Next to the December 31, 2015 Column

Projecting AGNC's gain (loss) on derivative instruments and other securities, net account is an analysis that involves several sub-accounts. This includes making assumptions within these derivative sub-accounts during the current quarter. One will never "fully" know management's derivatives activities for any given quarter until results are provided to the public via the company's quarterly SEC submissions. However, one can understand management's overall derivative strategy and make a projection on these derivative sub-accounts using the balances that were represented at the end of the previous quarter.

Such a detailed analysis was critical in the prior four quarters due to the events that unfolded in regards to MBS prices, the fixed pay rate on newly created interest rate swaps, and U.S. Treasury yields. I believe this detailed analysis is critical once again in regards to the fourth quarter of 2015. When using this methodology, along with deciding specific quarterly assumptions, I have consistently provided accurate projections within this account for several years (within a stated range).

Now let us take a look at AGNC's gain (loss) on derivative instruments and other securities, net account. I show my projection for this figure in Table 4 below. All past (ACTUAL) sub-account figures within Table 4 are derived from AGNC's quarterly SEC submissions via the company's 10-Q or 10-K where applicable. All projected (ESTIMATE) sub-account figures within Table 4 below are calculated and derived from multiple tables/charts that will not be shown within this particular article.

Table 4 - AGNC Quarterly Gain (Loss) on Derivative Instruments and Other Securities, Net Projection (All Sub-Accounts)

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(Source: Table created entirely by myself, partially using AGNC data obtained from the SEC's EDGAR Database)

Within AGNC's gain (loss) on derivative instruments and other securities, net account is the following four material sub-accounts that will be discussed below:

a) TBA MBS

b) Interest Rate Swaps

c) Interest Rate Swaptions

d) U.S. Treasury Securities

Each of the four material derivative sub-accounts listed above will be separately analyzed and discussed in corresponding order of the blue references under the "Ref." column in Table 4 above.

a) TBA MBS (Net Long Position as of 9/30/2015):

- Estimate of ($15) Million; Range ($165)-$135 Million

- Confidence Within Range = Moderate to High

- See Black Highlighted, Blue Referenced Sub-Account "a)" in Table 4 Above Next to the December 31, 2015 Column

Let us first briefly get accustomed with this type of derivative instrument. Typically, AGNC uses a combination of both long and (short) TBA MBS contracts during any given quarter. AGNC enters into TBA contracts with a long position where it agrees to buy, for future delivery, MBS with certain predetermined prices, face amounts, issuers, coupons, and stated maturities. AGNC enters into TBA contracts with a long position as an off-balance sheet means of investing in and financing MBS. Since TBA contracts with a long position are ultimately an extension of the balance sheet, this increases AGNC's "at risk" leverage. AGNC enters into TBA contracts with a (short) position where it agrees to sell, for future delivery, MBS with certain predetermined prices, face amounts, issuers, coupons, and stated maturities. Since TBA contracts with a (short) position are ultimately a reduction of the balance sheet, this decreases AGNC's "at risk" leverage.

There are two main factors that affect this derivative sub-account's valuation in a given quarter. The first factor is the dollar roll income (expense) generated on the net long (short) TBA MBS position. The second factor is the realized valuation gain (loss) upon the "settlement" of all TBA MBS contracts and the unrealized valuation gain (loss) on all contracts that have yet to be settled during the quarter (one instance being a "re-rolled" TBA MBS position).

For the third quarter of 2015, AGNC reported a TBA MBS total net valuation gain of $213 million. When broken out, AGNC reported net dollar roll income of $73 million and a TBA MBS net valuation gain of $140 million. As of 6/30/2015, AGNC had a net long TBA MBS position of $6.9 billion (based on notional amount). AGNC had a net long TBA MBS position of $7.1 billion as of 9/30/2015. When calculated, AGNC increased the company's net long TBA MBS position by $0.2 billion during the third quarter of 2015.

As will be discussed further in PART 3 of this article, MBS prices net decreased within all fixed-rate agency MBS coupons during the fourth quarter of 2015. As such, three general scenarios likely occurred within this derivative sub-account. If the assumption is made that AGNC materially increased its net long TBA MBS position during October 2015, then the company would have a modest total net valuation loss for this derivative sub-account (lower end of my projected range). If the assumption is made that AGNC materially decreased the company's net long TBA MBS position during the fourth quarter of 2015 (including the notion of changing this balance to a net (short) position), then the company would have a modest total net valuation gain for this derivative sub-account (higher end of my projected range). If the assumption is made that AGNC only slightly altered the company's net long TBA MBS position as of 9/30/2015, then the company would have a minor total net valuation gain (loss) for this derivative sub-account.

Through interpreting management's comments via several prior investor presentations and earnings conference calls, I have made the assumption AGNC slightly - modestly decreased the company's net long TBA MBS position as of 9/30/2015 during the second-half of the fourth quarter of 2015. Therefore, I believe the third scenario likely occurred. Through a detailed analysis that will be omitted from this particular article, when combining the company's projected quarterly net dollar roll income of $60 million and a quarterly net valuation loss of ($75) million, I am projecting AGNC's TBA MBS had a total net valuation loss of ($15) million for the fourth quarter of 2015.

b) Interest Rate Swaps (Net (Short) Position as of 9/30/2015):

- Estimate of $360 Million; Range $110-$610 Million

- Confidence Within Range = Moderate to High

- See Purple Highlighted, Blue Referenced Secondary Sub-Accounts "b)" in Table 4 Above Next to the December 31, 2015 Column

Let us first discuss the recent history of this derivative sub-account, which will lead to a better understanding of my projected total net valuation gain for the fourth quarter of 2015. AGNC had a net (short) interest rate swaps position of ($45.2) billion as of 9/30/2015 (based on notional amount). AGNC had interest rate swap additions of ($1.5) billion and interest rate swap expirations or terminations of $1.2 billion during the third quarter of 2015.

There was little activity within AGNC's interest rate swaps during the third quarter of 2015 for two main reasons. First, as was discussed in PART 1 of this article, AGNC first decreased then reversed course and increased the company's on-balance sheet MBS portfolio by $2.2 billion during the third quarter of 2015 (based on par value). As such, to match a slight net increase to the company's MBS portfolio, AGNC slightly increased the company's net (short) interest rate swaps position as well. Second, due to the Federal Open Market Committee's ("FOMC") rhetoric regarding a likely increase to the Federal ("Fed") Funds Rate in December 2015, management believed the risks associated with the fixed-rate agency MBS market remained elevated going into the fourth quarter of 2015. Due to AGNC's continued "cautious" risk management strategy, the company's hedging coverage ratio increased from 84% to 96% during the third quarter of 2015, even when there was little activity within this derivative sub-account.

Using Table 4 above as a reference, there are two secondary sub-accounts to discuss when projecting a total net valuation gain (loss) for AGNC's interest rate swaps. The first secondary sub-account is AGNC's "net periodic interest costs of interest rate swaps" expense. If one recalls, this figure was first discussed in AGNC's interest expense account during PART 1 of this article. In regards to AGNC's interest rate swaps net (short) position as of 9/30/2015, the company had a weighted average fixed pay rate of 1.95% and a weighted average floating receive rate of 0.30%. However, when excluding forward-starting interest rate swaps, this weighted average fixed pay rate was 1.72%.

When all factors and assumptions are taken into consideration, I project AGNC will record a slight decrease in the company's net periodic interest costs of interest rate swaps expense for the fourth quarter of 2015. This is due to the following three assumed interest rate swap factors during the quarter: 1) relatively unchanged average notional balance as AGNC remained fairly cautious regarding its risk management strategy, 2) minor increase in the weighted average fixed pay rate on all newly created contracts when compared to terminated/settled contracts (mainly due to net rising interest rates), and 3) modest increase in the average floating receive rate on all contracts (especially during December 2015). Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC had a net periodic interest costs of interest rate swaps expense of $100 million for the fourth quarter of 2015. This calculates to a decreased expense of ($7) million when compared to the prior quarter.

The second secondary sub-account to discuss relates to the net valuation gain (loss) on AGNC's interest rate swaps. Depending on the tenor/maturity of a particular interest rate swap contract, results significantly varied during the fourth quarter of 2015. As such, results across the mREIT sector (in regards to this particular derivative sub-account) will also significantly vary accordingly. In fact, what occurred during the fourth quarter of 2015 defied past trends witnessed over the past several years. For some readers/contributors, this will be somewhat of a surprise as each mREIT reports earnings. However, the trends that occurred were not surprising to myself, especially with the FOMC's rhetoric leading up to the December 2015 "rate hike."

The fixed pay rate on interest rate swap contracts with a tenor/maturity towards the shorter-end of the yield curve had a material net increase in valuations during the fourth quarter of 2015. The fixed pay rate on interest rate swap contracts with a tenor/maturity towards the longer-end of the yield curve had a modest net increase in valuations during the fourth quarter of 2015. It should be noted a sizable move in valuations occurred during the last month of the fourth quarter of 2015. This was in direct relation to the market's assumption that the FOMC would raise the FED Funds Rate in December 2015. Companies who had a higher hedging coverage ratio heading into the fourth quarter of 2015 benefited from this trend. Companies who had a lower hedging coverage ratio either did not benefit from the material increase in valuations and/or entered into less "appealing" interest rate payer swap contracts after the move in rates began to occur. This was not a material concern for AGNC but was so for several other mREIT peers.

Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC's second secondary sub-account had a net valuation gain of $460 million for the fourth quarter of 2015. When both secondary sub-accounts are combined, I am projecting AGNC's interest rate swaps had a total net valuation gain of $360 million for the fourth quarter of 2015.

c) Interest Rate Swaptions (Net (Short) Position as of 9/30/2015):

- Estimate of $25 Million; Range ($25)-$75 Million

- Confidence Within Range = Moderate to High

- See Pink Highlighted, Blue Referenced Sub-Account "c)" in Table 4 Above Next to the December 31, 2015 Column

Let us first briefly get accustomed with this type of derivative instrument. Interest rate swaptions are options to enter into underlying interest rate swap contracts. Whereas interest rate swap contracts have no initial "up-front" costs (gains and losses are incurred as interest rates fluctuate over the life of the swaps), interest rate swaptions have implicit up-front costs (similar to an option contract, generally speaking).

Let us discuss the recent history of this derivative sub-account, which will lead to a better understanding of my projected total net valuation gain for the fourth quarter of 2015. AGNC had a net (short) interest rate swaptions position of ($3.7) billion as of 9/30/2015 (based on the notional balance of the underlying interest rate swaps). AGNC had no interest rate payer swaption additions and $1.8 billion of interest rate payer swaption exercises, expirations, or terminations during the third quarter of 2015. As of 9/30/2015, AGNC's interest rate payer swaptions had a weighted average of 5 months until expiration with an underlying interest rate swaps weighted average tenor/maturity of 8.2 years.

Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC's interest rate swaptions that were either held throughout the quarter or entered into during the quarter had a net valuation gain of $35 million for the fourth quarter of 2015. I am also projecting AGNC exercised, had expired, or terminated interest rate payer swaptions for a net valuation loss of ($10) million. Therefore, when these two figures are combined, I am projecting AGNC's interest rate swaptions had a total net valuation gain of $25 million for the fourth quarter of 2015. I would consider this more of an "aggressive" projection. Even with the increase in underlying swap rates during the fourth quarter of 2015, the probability of AGNC's existing interest rate swaptions eventually being worthless is still fairly high.

d) U.S. Treasury Securities (Net (Short) Position as of 9/30/2015):

- Estimate of $14 Million; Range ($136)-$164 Million

- Confidence Within Range = Moderate

- See Dark Blue, Brown, and Teal Highlighted, Blue Referenced Secondary Sub-Accounts "d)" in Table 4 Above Next to the December 31, 2015 Column

Let us first briefly get accustomed with this type of derivative instrument. AGNC purchases (or sells short) U.S. Treasury securities and U.S. Treasury security futures to help mitigate the potential impact of changes in mortgage interest rates (hence the valuation of the company's MBS portfolio). AGNC borrows securities to cover U.S. Treasury (short sales) under reverse repurchase agreements. AGNC accounts for these derivative instruments as "security borrowing transactions" and recognizes an obligation to return the borrowed securities at fair market value ("FMV") based on the current value of the underlying borrowed securities.

Let us discuss the recent history of this derivative sub-account, which will lead to a better understanding of my projected total net valuation gain for the fourth quarter of 2015. AGNC had the following three derivative secondary sub-account positions as of 9/30/2015: 1) long U.S. Treasury securities of $0.8 billion, 2) (short) U.S. Treasury securities of ($1.3) billion, and 3) U.S. Treasury security futures sold (short) of ($0.7) billion. This is based on each secondary sub-account's face amount ("par"). When combining all three secondary sub-accounts together, AGNC switched from a net long U.S. Treasury securities position of $2.2 billion as of 6/30/2015 to a net (short) position of ($1.3) billion as of 9/30/2015. AGNC was net long U.S. Treasury securities with a 5-year maturity while the company was net (short) U.S. Treasury securities with a 7- and 10-year maturity.

Three likely scenarios occurred within this derivative sub-account during the fourth quarter of 2015. If the assumption is made that AGNC switched back to a net long U.S. Treasury securities position during the first half of the fourth quarter of 2015, then the company would likely have a modest total net valuation loss for this derivative sub-account (lower end of my projected range). If the assumption is made that AGNC modestly - materially increased the company's net (short) U.S. Treasury securities position during the fourth quarter of 2015, then management would likely have a modest total net valuation gain for this derivative sub-account (higher end of my projected range).

If the assumption is made that AGNC maintained a minor net (short) U.S. Treasury securities position throughout most of the quarter, then the company would likely have a minor total net valuation gain for this derivative sub-account. The amount of the total net valuation gain would be dependent on the timing of the net long (short) positions as yields fluctuated throughout the quarter. These three scenarios are not "every" possible scenario that could have occurred within this derivative sub-account. However, I believe these three scenarios would have caused the greatest amount of FMV fluctuations. To put things in better perspective, yields on 5-, 7-, and 10-year U.S. Treasury securities increased 39, 34, and 21 basis points ("bps") during the fourth quarter of 2015, respectively.

Unless management modestly - materially increased AGNC's net (short) position early in the quarter, the company had a minor net valuation fluctuation within this derivative sub-account for the fourth quarter of 2015. Since U.S. Treasury securities are one of the most liquid investments in the marketplace, this is an entirely possible notion to consider. AGNC trades U.S. Treasury securities throughout the quarter. However, with that being said, I have made the assumption AGNC was not overly "bearish" or "bullish" on U.S. Treasury yields during the quarter. Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC's U.S. Treasury securities and U.S. Treasury security futures had a total net valuation gain of $14 million for the fourth quarter of 2015. To offset my more aggressive swaption projection, I would consider this more of a "cautious" projection.

As stated earlier, all remaining derivative sub-accounts within Table 4 above are deemed immaterial for discussion purposes. As such, these immaterial derivative sub-accounts will be omitted from any analysis even though a projected net valuation gain (loss) has been included in Table 4. This includes valuation projections on the following derivative sub-accounts: 1) interest-only and principle-only strips, 2) debt on consolidated variable-interest-entities ("VIE"), 3) REIT equity securities, and 4) put options (when applicable).

When combining all the derivative sub-accounts together (both material and immaterial), I am projecting AGNC's derivative instruments and other securities, net account had a total net valuation gain of $385 million for the fourth quarter of 2015.

Brief Discussion of MTGE's and NLY's Derivatives Portfolio:

I see some general similarities between AGNC and the company's affiliate American Capital Mortgage Investment Corp. (NASDAQ:MTGE) regarding hedging strategies. However, there usually are a few differences between AGNC's and MTGE's derivatives portfolio as well. One minor difference was each company's TBA MBS position as of 9/30/2015 (proportionately speaking). As stated earlier, AGNC had a net long TBA MBS position of $7.1 billion as of 9/30/2015. This was equal to 13% of AGNC's on-balance sheet MBS portfolio. In comparison, MTGE had a net long TBA MBS position of $0.5 billion as of 9/30/2015. This was equal to 16% of MTGE's on-balance sheet agency MBS portfolio. Another difference to note was MTGE had a modestly lower net (short) interest rate swaps position as of 9/30/2015 when compared to AGNC (proportionately speaking). When all derivative sub-accounts are taken into consideration, AGNC and MTGE had a hedging coverage ratio as of 9/30/2015 of 96% and 72%, respectively.

When it comes to AGNC's closest sector peer NLY, I see several differences that would affect the derivative sub-accounts described above. I will note a few of these differences. AGNC and NLY had a modest difference in each company's TBA MBS position as of 9/30/2015. As discussed earlier, AGNC had a net long TBA MBS position of $7.1 billion as of 9/30/2015. In comparison, NLY had a net long TBA MBS position of $14.1 billion as of 9/30/2015. Since NLY had a material net long TBA MBS position as of 9/30/2015, the probability of the company generating a modest - material amount of net dollar roll income during the fourth quarter of 2015 was relatively high. Simply put, NLY continued to utilize the financing advantage of the TBA forward market. However, NLY likely had a more severe net valuation loss within the company's TBA MBS portfolio when compared to AGNC during the fourth quarter of 2015 (proportionately speaking).

Second, AGNC and NLY had a material difference in each company's hedging coverage ratio as of 9/30/2015. As stated above, AGNC had a hedging coverage ratio of 96%. In sharp contrast, NLY had a hedging coverage ratio of only 55%. As such, NLY was more vulnerable if mortgage interest rates/U.S. Treasury yields modestly - materially increased during the fourth quarter of 2015. This specific scenario did, in fact, occur (to a modest extent). As such, NLY's lower hedging coverage ratio at the start of the fourth quarter of 2015 was one detriment regarding a lower total net valuation gain within the company's derivatives portfolio. Further analysis of NLY's MBS and derivatives portfolios were discussed within the following article:

Annaly Capital's BV, Dividend, And Valuation Compared To 19 mREIT Peers (Post Q3 2015 Earnings) - Part 1

Annaly Capital's BV, Dividend, And Valuation Compared To 19 mREIT Peers (Post Q3 2015 Earnings) - Part 2

5) Management Fees:

- Estimate of $27 Million; Range $24-$30 Million

- Confidence Within Range = High

- See Boxed Blue Reference "5" in Tables 5 and 6 Below Next to the December 31, 2015 Column

AGNC has a base management fee paid in arrears equal to an amount that is 1/12th of 1.25% of the company's equity balance. Equity is defined as AGNC's month-ended stockholders' equity, adjusted to exclude the effect of any unrealized gains (losses) included in either retained earnings or accumulated OCI/(OCL).

I show my projection for this figure in Table 5 below. All past (ACTUAL) figures within Table 5 are derived from AGNC's quarterly SEC submissions via the company's 10-Q or 10-K where applicable. This excludes all recalculated figures and ratios. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC's management fees expense account.

Table 5 - AGNC Quarterly Management Fees Projection

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(Source: Table created entirely by myself, partially using AGNC data obtained from the SEC's EDGAR Database [link provided below Table 4])

Using Table 5 above as a reference, I am projecting AGNC's management fees expense to decrease by ($2) million for the fourth quarter of 2015 when compared to the third quarter of 2015 ($27 million versus $29 million). Further analysis and discussion of this account is unwarranted.

Side Note: Two remaining accounts within AGNC's consolidated statement of comprehensive income that affect the company's net income (loss) amount are the following: 1) general/administrative expenses and 2) income tax provision (benefit). These two accounts are immaterial for discussion purposes and will be excluded from any analysis within this article.

A) Net Income (Loss):

- Estimate of $566 Million; Range $316-$816 Million

- Net Income Available to Common Shareholders of $1.62 Per Share (Excluding OCI/(OCL)); Range $0.90-$2.35 Per Share

- Confidence Within Range = Moderate to High

- See Red Reference "A" in Table 6 Below Next to the December 31, 2015 Column

Finally, let us look at my projection for AGNC's quarterly net income for the fourth quarter of 2015. This information is provided in Table 6 below.

Table 6 - AGNC Quarterly Net Income (Loss) Projection

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(Source: Table created entirely by myself, partially using data obtained from AGNC's quarterly investor presentation slides)

Table 6 is a summation of the following consolidated statement of comprehensive income accounts for the fourth quarter of 2015: 1) interest income of $365 million, 2) interest expense of $90 million, 3) loss on sale of agency securities, net of ($60) million, 4) gain on derivative instruments and other securities, net of $385 million, 5) management fees of $27 million, 6) general and administrative expenses of $7 million, and 7) excise tax of $0. Therefore, when these seven accounts are combined, I am projecting AGNC had net income of $566 million for the fourth quarter of 2015. After accounting for AGNC's quarterly preferred stock dividends, this would be earnings available to common shareholders of $1.62 per share.

Conclusions Drawn (PART 2):

To sum up the analysis above, I am projecting AGNC will report the following account figures for the fourth quarter of 2015 (refer back to Table 6 above):

4) Quarterly Net Gain on Derivative Instruments and Other Securities of $385 Million

5) Quarterly Management Fees of $27 Million

I am projecting AGNC will report the following net income and EPS amounts for the fourth quarter of 2015 (refer back to Table 6):

A) Quarterly Net Income of $566 Million and Earnings Available to Common Shareholders of $1.62 Per Share

AGNC's projected net income of $566 million for the fourth quarter of 2015 is materially higher when compared to a net loss of ($633) million for the third quarter of 2015. This is mainly due to AGNC's projected net valuation gain of $385 million on the company's derivatives portfolio for the fourth quarter of 2015. For the same account in the prior quarter, AGNC recognized a net valuation loss of ($778) million.

Even though I am projecting AGNC will report material net income for the fourth quarter of 2015, readers should also understand I am projecting the company will report a weak OCI/(OCL) amount, which will be projected in PART 3 of this article. As stated in PART 1 of this article, AGNC's OCI/(OCL) amount is part of the company's consolidated statement of comprehensive income but EXCLUDED from the company's net income (loss) and EPS amounts. As such, I strongly suggest holding off on a "final verdict" regarding AGNC's results for the fourth quarter of 2015 until PART 3 of this article is released. In my professional opinion, I believe AGNC's "comprehensive income (loss)" amount is more important than the company's net income (loss) and EPS amounts.

Final Note: PART 2 of this article is only a PARTIAL analysis of AGNC's consolidated statement of comprehensive income for the fourth quarter of 2015. As such, a "final" conclusion will not be provided yet (including my BUY, SELL, or HOLD recommendation). PART 3 of this article will just pick up where PART 2's analysis ends. PART 3 of this article will discuss AGNC's projected OCI/(OCL) and comprehensive income (loss) amounts. PART 3 will be provided in the near future. This will be followed by a projection of AGNC's BV as of 12/31/2015 and 1/22/2016, which will be available to readers prior to the company's earnings press release for the fourth quarter of 2015 in early February.

Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader's current investing strategy. By reading this article, I hope readers can better understand how AGNC (or any mREIT) generates income, incurs expenses, and values assets held for investment.

Disclosure: I am/we are long AGNC, MTGE, ORC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I currently have no position in ARR, CYS, and NLY.